【Answers】
3 Spike Limited
(a) A budget forms the basis of many performance management systems. Once set, it can be compared to the actual results of
an organisation to assess performance. A change to the budget can be allowed in some circumstances but these must be
carefully controlled if abuse is to be prevented.
Allow budget revisions when something has happened that is beyond the control of the organisation which renders the original
budget inappropriate for use as a performance management tool.
These adjustments should be approved by senior management who should attempt to take an objective and independent
view.
Disallow budget revisions for operational issues. Any item that is within the operational control of an organisation should not
be adjusted.
This type of decision is often complicated and each case should be viewed on its merits.
The direction of any variance (adverse or favourable) is not relevant in this decision.
(b) Materials
Arguments in favour of allowing a revision
– The nature of the problem is outside the control of the organisation. The supplier went in to liquidation; it is doubtful
that Spike Limited could have expected this or prevented it from happening.
The buyer, knowing that budget revisions are common, is likely to see the liquidation as outside his control and hence
expect a revision to be allowed. He may see it as unjust if this is not the case and this can be demoralising.
Arguments against allowing a budget revision
– There is evidence that the buyer panicked a little in response to the liquidation. He may have accepted the first offer
that became available (without negotiation) and therefore incurred more cost than was necessary.
– A cheaper, more local supplier may well have been available, so it could be argued that the extra delivery cost need not
have been incurred. This could be said to have been an operational error.
Conclusion
The cause of this problem (liquidation) is outside the control of the organisation and this is the prime cause of the overspend.
Urgent problems need urgent solutions and a buyer should not be penalised in this case. A budget revision should be allowed.
Labour
Arguments in favour of allowing a revision
– The board made this decision, not the departmental manager. It could be argued that the extra cost on the department’s
budget is outside their control.
Arguments against allowing a budget revision
– This decision is entirely within the control of the organisation as a whole. As such, it would fall under the definition of
an operational decision. It is not usual to allow a revision in these circumstances.
– It is stated in the question that the departmental manager complained in his board report that the staff level needed
improving. It appears that he got his wish and the board could be said to have merely approved the change.
– The department will have benefited from the productivity increases that may have resulted in the change of policy. If the
department takes the benefit then perhaps they should take the increased costs as well.
Conclusion
This is primarily an operational decision that the departmental manager agreed with and indeed suggested in his board report.
No budget revision should be allowed.
An alternative view is that the board made the final decision and as such the policy change was outside the direct control of
the departmental manager. In this case a budget revision would be allowed.
(c) Total sales variances
Sales price variance = (Actual SP – Std SP) x Act sales volume
= (16·40 – 17·00) x 176,000
= $105,600 (Adverse)
Sales volume variance = (Actual sales volume – Budget sales volume) x Std contribution
= (176,000 – 180,000) x 7
= $28,000 (Adverse)
(d) Market size and share variances
Market size variance = (Revised sales volume – budget sales volume) x Std contribution
= (160,000 – 180,000) x 7
= $140,000 (Adverse)
Market share variance = (Actual sales volume – revised sales volume) x Std contribution
= (176,000 – 160,000) x 7
= $112,000 (Favourable)
(e) Comment on sales performance
Sales Price
The biggest issue seems to be the decision to reduce the sales price from $17·00 down to $16·40. This ‘lost’ $105,600 of
revenue on sales made compared to the standard price.
It seems likely that the business is under pressure on sales due to the increased popularity of electronic diaries. As such, they
may have felt that they had to reduce prices to sustain sales at even the level they achieved.
Volume
The analysis of sales volume into market size and share shows the usefulness of planning and operational variances. Overall,
the sales level of the business is down by 4,000 units, losing the business $28,000 of contribution or profit. This calculation
does not in itself explain how the sales department of the business has performed.
In the face of a shrinking market they seem to have performed well. The revised level of sales (allowing for the shrinking
market) is 160,000 units and the business managed to beat this level comfortably by selling 176,000 units in the period.
As mentioned above, the reducing price could have contributed to the maintenance of the sales level. Additionally, the
improved quality of support staff may have helped maintain the sales level. Equally the actions of competitors are relevant to
how the business has performed. If competitors have been active then merely maintaining sales could be seen as an
achievement.
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